Volatility Skew Assessment
Volatility skew assessment is the analysis of how implied volatility varies across different strike prices for options on the same underlying asset. In many markets, options with lower strike prices often have higher implied volatility, reflecting the market's fear of a crash.
This skew provides valuable information about market sentiment and the perceived distribution of future returns. Traders use this assessment to identify mispriced options and to structure trades that capitalize on expected changes in the skew.
It is a critical component of options pricing models, which often assume constant volatility, a limitation that skew adjustment addresses. Monitoring changes in the skew can signal shifts in market participants' outlook.
It is essential for sophisticated options trading and hedging strategies.